Newly-formed CommonSpirit Health is gearing up to make a big splash in bond markets, preparing to restructure or refinance billions in debt.
In the more than two years Catholic Health Initiatives and Dignity Health worked to cement their merger to form the new Chicago-based health system, both systems avoided public debt markets. This week, CommonSpirit announced that it may restructure or refinance its roughly $13.7 billion in outstanding debt as it moves to merge into a single credit group.
CommonSpirit CFO Dan Morissette said he's not sure yet exactly how much of the outstanding debt will be refinanced, but it will likely range between $4 billion and $6 billion in both taxable and tax-exempt debt.
"Neither organization has issued long-term debt in a few years, so we believe there will be an appetite for that," Morissette said.
CHI has about $8.5 billion in outstanding debt and Dignity has about $5.2 billion, the companies said on a March investor call to present their second quarter fiscal 2019 results. Morissette said those numbers are still accurate.
Because the health systems' futures were unclear, neither CHI nor Dignity issued public debt in the two years between announcing and closing their merger. Investors require detailed financial projections before buying bonds, which the systems couldn't offer in that window. Instead, CHI and Dignity turned to bridge financing strategies like private placements with banks.
CommonSpirit's April 24 notice cautioned there's no assurance any portion of the bonds will be refinanced, or that consolidating into a single credit will actually happen.
"I think it could be quite a large refunding," said Martin Arrick, a managing director in S&P Global's not-for-profit healthcare group.
CommonSpirit was widely expected to announce the plans to refinance its debt, so this week's announcement was no surprise, he said. "Neither side has really been in the market for roughly 2 years."
A sizable proportion of both CHI and Dignity's outstanding debt is taxable: 32% of CHI's debt is taxable fixed and direct placement, compared with 36% for Dignity.
Henry Grady, an industry specialist in SunTrust Bank's healthcare specialty division, said those taxable ratios are higher than the not-for-profit health systems he works with in the Mid-Atlantic region. He said it's not surprising given the cost difference between taxable and tax-exempt debt continues to narrow. When organizations issue tax-exempt debt, they have to identify a specific use and assets must be attached to every dollar, Grady said. "It's a very cumbersome and onerous process," he said.
That's not the case with taxable debt.
CommonSpirit wrote that it expects Citigroup Global Markets, J.P. Morgan Securities and Morgan Stanley & Co. to serve as underwriters in connection with the issuance of any bonds.
Consolidating into a single credit group post-merger is a "well-worn path" that many health systems have already done, so Arrick said he doesn't foresee CommonSpirit encountering any major hurdles. The real challenge will be aligning the culture of the two legacy health systems, he said.
"I don't think it's conceptually difficult," Arrick said. "Whereas, how do you create a single culture? That's hard."